FERC Reexamines its Policy on Hydro License Terms

The term of years granted in a federal hydroelectric license is a major – if not the major – factor in inducing a licensee to invest money in a hydroelectric project.  The longer the term, the greater the opportunity to earn a return on such investments, particularly given the year-to-year variability of river flows.  Thus it was not surprising that the Federal Energy Regulatory Commission’s (“FERC’s”) recent Notice of Inquiry (“NOI”) on the length of license terms in Docket No. RM17-4 drew a range of responses across a swath of interest groups.  What was perhaps unexpected was the apparent consensus regarding misalignment of incentives in FERC’s current policies regarding establishment of license term, and the divided suggestions on what needs to happen to reform them.

As hydro development matured and more projects needed relicensing, Congress amended Part I of the Federal Power Act in 1986, giving FERC discretion to award terms of 30 to 50 years.  At the time, the prevailing view was that existing hydro generation had imposed high environmental costs.  Under the amended statute, licenses issued in relicensing were conditioned on the implementation of environmental measures, and FERC could consider the number of years for project owners to amortize the imposed environmental measures as part of its determination of a new license term.  FERC’s policy, developed in the years after the statute was amended, is to establish 30-year terms for projects with little or no redevelopment or environmental mitigation and enhancement measures; 40-year terms for projects with a moderate amount of such activities and 50-year terms for projects with extensive measures.  See Consumers Power Co., 68 FERC ¶ 61,077 at 61,383-84 (1994).

Thirty years after the statute was amended, with climate change looming and almost three decades of experience with its existing policy, FERC is now confronting different facts and priorities.  While renewable generation has greatly increased market share during the past decades, in many cases incentives for solar and wind have rendered hydro a less attractive renewable investment by comparison. The relicensing process for hydro projects has also grown to be unwieldy and expensive.  Within this context, there is little wonder at FERC’s decision to reexamine its license term policies.

The NOI, issued November 17, 2016 (a little more than a week after the Presidential Election), is found here.  The major questions posed by FERC in the NOI were:

  • Should FERC accept a license term agreed upon in applicable settlement agreements?
  • Should FERC consider investments, improvements and other measures implemented during the prior license term in determining the new license term?
  • Should FERC establish a default license term of 50 years?
  • Should FERC add a more quantitative cost-based analysis to inform license terms?

More than forty (40) responses were submitted by more than two dozen hydroelectric licensees and related industry groups subject to FERC’s licensing requirements (“industry commenters”), as well as various federal and state government agencies and non-governmental organizations (“governmental/NGO commenters”).  Nearly all of the commenters supported some reforms to FERC’s current policies governing the hydro license terms.

Settlements:  Nearly all commenters agree that FERC’s policies should accept or at least defer to the length of license term negotiated as part of a comprehensive settlement among stakeholders.  Licensees expressed in comments the risk and disincentive for them to embark on the costly and time-consuming task of coordinating a settlement when FERC has rejected the negotiated length of a license term but accepted the other bargained-for provisions of the settlement.

Measures Implemented in Prior License Term:  Most but not all commenters supported the notion that beneficial measures, e.g., developmental, environmental, recreation and maintenance activities, that were implemented under the prior license should be considered by FERC in determining relicensing terms.  The governmental/NGO commenters emphasized that FERC should only consider prior measures that are voluntarily undertaken by the licensee and not otherwise required.  For their part, industry commenters cited past experience to show how FERC’s current policy frustrates incentives to implement beneficial measures during the license term and instead encourages licensees to wait until relicensing—sometimes many years away—to propose such measures so that the licensee may receive license term credit.  Many of the governmental/NGO commenters also agreed that current FERC policy unwittingly acts as a disincentive for licensees to implement environmental measures in an existing license.

50-Year Default Term:  The most divisive option in the NOI was whether FERC should consider a default 50-year license term.  Comments were split neatly between the industry commenters (supporting) and the governmental/NGO commenters on the other hand (opposing).  Long license terms, argued governmental/NGO commenters, effectively prevent the regulator from addressing emerging environmental concerns arising during the license term.  The industry commenters responded that FERC can (and already does) include reopener provisions in licenses that give it authority to address environmental issues that unexpectedly arise during the term of a license.

Quantitative Approach: With some exceptions, most commenters expressed concerns about FERC’s suggestion of a quantitative cost-based approach to determining license terms.  Commenters noted that it is unclear how such an approach would be implemented and what assumptions would be included in the cost-based analysis as applied to the significantly different sizes, types and settings of licensed projects. 

Looking ahead, the specific items addressed in the NOI indicate a growing recognition by FERC Staff that some license term determinations have created real obstacles for achieving the statutory objectives for non-federal hydropower investment and might be affecting the formation of settlements that could otherwise shorten the licensing process.  This may be borne out by the challenges to FERC’s licensing orders pursued by licensees with rehearing requests at FERC and with judicial challenges, including before the U.S. Circuit Court of Appeals for the D.C. Circuit.  See, e.g., Duke Energy Carolinas, LLC v. FERC, Case No. 16-1296 (D.C. Cir.) (filed on Aug. 22, 2016).   

Despite the recognition of these issues in the NOI, FERC’s initiation of this proceeding is discretionary and there is no timeline – or even any obligation – for further action by FERC.  The future new FERC commissioners and the current lack of quorum at FERC add to the uncertainty in this proceeding.  Since Commissioner Norman Bay’s departure from FERC on February 3, 2017, FERC has lacked the required minimum of three commissioners to conduct regular business.  Confirmation by the U.S. Senate is required for new FERC commissioners, and no candidate(s) have been named by the new administration (as of the time of writing).  Unfortunately, development of new rules and FERC policy on license terms cannot be accomplished by FERC Staff alone.  Even after FERC regains a quorum, its policy perspectives are likely to be different from the FERC leadership that initiated this NOI, and thus the prospects for further action on license term issues is uncertain.